Public Funds Looking Askance at Hedge Funds

Nathaniel Popper has a nice piece about sovereign wealth funds and other kinds of public investment vehicles growing increasingly skeptical about the merits of investing with hedge funds, private equity funds, and other high-fee vehicles.

Pretty basic logic suggests that they are right to be skeptical. Think of it this way: The basic problem is that however hard it is for any given person or entity to pick and choose stocks to invest in, it’s equally hard for that person or entity to pick and choose which hedge fund to invest in. Except the picking difficulty is exacerbated by the fees. To pick a manager whose fee-adjusted returns are better than the returns you could get just picking investments yourself is doubly hard. Particularly if you have a large pool of funds to manage, the attraction of simply hiring people to manage the funds—in other words becoming the hedge fund rather than hiring the hedge fund—is attractive, since it at least flattens out the number of layers of management and fees.